Ontario's 2016 Budget was announced on February 25, 2016 and included changes to Research and Development Tax Credits. The information below has been updated to reflect those changes.
In an effort to promote research and development activities in Canada, the federal government offers the Scientific Research and Experimental Development (SR&ED) tax incentive program. Medical doctors and other regulated professionals who have research responsibilities and are engaged in qualifying SR&ED activities can take advantage of the attractive tax savings provided by the SR&ED tax incentive program.
Despite the attractive tax savings, the medical research community can face complexities in taking advantage of the SR&ED tax incentive program due to the administrative burden associated with making SR&ED claims. Often times the costs of making a standalone SR&ED claim can exceed the potential benefit. In addition, given the broad scope of the type of research activities conducted by medical professionals, determining which activities and expenditures qualify as SR&ED can be difficult. Therefore, the tax benefits associated with carrying on research and development activities often go unclaimed. To mitigate these issues, many medical professionals who conduct research and development have forged relationships with hospitals and universities to create approved research institutes. This type of relationship greatly simplifies the SR&ED claim process.
SR&ED – The Basic Criteria and Tax Benefits
For an activity to qualify as SR&ED under the Income Tax Act, taxpayers need to meet three basic criteria. First, the activity must provide for a scientific or technological advancement. Second, a technological uncertainty must be resolved. Third, the activity must contain scientific or technological content.
Once it has been established that the activities qualify as SR&ED, the program provides two major tax benefits for taxpayers carrying on research and development activities:
- A taxpayer is entitled to a deduction for all qualifying current SR&ED expenditures incurred in the year. Qualifying expenditures can include a portion of the salary paid by a professional corporation to the professional undertaking the research and development activities, and payments made by taxpayers to approved research institutes. Undeducted SR&ED expenditures can be carried over and deducted in future years.
- The SR&ED expenditures incurred can generate investment tax credits, which taxpayers can use to reduce income taxes or, in some cases, generate a tax refund for the taxpayer.
SR&ED – Investment Tax Credits (ITC)
A Canadian-controlled private corporation (CCPC) such as a professional corporation, can earn a 35 per cent federal investment tax credit (ITC) on up to $3 million of qualifying SR&ED expenditures annually. A gradual reduction on the $3 million expenditure limit can occur where in the prior year a corporation or an associated group of corporations had taxable income greater than $500,000 or taxable capital greater than $10 million. The $3 million expenditure limit is completely ground down where in the prior year a corporation or group of associated corporations had taxable income greater than $800,000 or taxable capital greater than $50 million. The federal ITC rate applied to qualified SR&ED expenditures in excess of the expenditure limit is 15 per cent. An individual carrying on SR&ED activities can only qualify for a federal ITC rate of 15 per cent.
As discussed above, the ITC can be applied as a reduction of federal taxes payable for the year and any amount remaining may generate a cash refund. For CCPCs, the ITC earned at the 35 per cent rate would qualify for a 100 per cent refund, provided the ITC relates to current SR&ED expenditures. The ITC earned at the 15 per cent rate would be eligible for a 40 per cent refund. For individuals, the refund rate is 40 per cent. Alternatively, if it is advantageous, any unused ITC can generally be carried back three years or forward for up to 20 years. Any ITC claimed is considered taxable income in the tax year that is subsequent to the year in which it was claimed and will be subject to income tax.
SR&ED – Ontario Tax Benefits
There are also provincial tax benefits for professional corporations carrying on research and development activities in Ontario. The Ontario innovation tax credit mirrors the federal refundable ITC for CCPCs and, effective June 1, 2016, is calculated at the rate of 8 per cent of qualified expenditures. To the extent that the Ontario innovation tax credit is not used to reduce taxes in the current year, it is fully refundable to the corporation. This benefit is subject to the same grind down thresholds as the federal ITC.
The Ontario business research institute tax credit is available to professional corporations as well as professional corporations that are in a partnership that has entered into contracts with eligible research institutes. This credit is fully refundable to the professional corporation at a rate of 20 per cent of qualified expenditures.
The non-refundable Ontario research and development tax credit, effective June 1, 2016, is calculated at the rate of 3.5 per cent of qualified expenditures.
Each of the above Ontario tax credits are considered government assistance and will reduce the SR&ED expenditures deductible for tax and eligible for the federal ITC. These benefits are only available to corporations and not individuals.
Effective Cost of Qualifying SR&ED for Health Professionals
As shown in the following table, a health professional with research responsibilities who takes advantage of the SR&ED tax incentives can significantly reduce the cost of his or her research activities.
Qualifying SR&ED Expenditures - Payment to Approved Research Institute
|Qualifying SR&ED Expenditures - Salary to Professional|
|Federal ITC and Ontario Innovation Tax Credit||($3,070)||($1,200)||($6,056)||($2,325)|
|Ontario Research & Development Tax Credit||($258)||N/A||($499)||N/A|
|Tax Deduction Value – 15% (PC) or 53% (Individual)||($1001)||($4,664)||($517)||($4,068)|
|After Tax Cost||$5,671||$4,136||$2,928||$3,607|
Professional corporations and individuals, who have research responsibilities and are engaged in qualifying SR&ED activities, can take advantage of the attractive tax savings provided by the SR&ED tax incentive program. However, diligence will ensure expenditures incurred and activities carried out meet the definition of SR&ED, are properly documented and are supported. To learn if the research and development activities you carry on are eligible for an SR&ED tax claim, contact a member of the Crowe Soberman Tax Group.
Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication. The information in this Tax Letter is current to March 1, 2016. The information contained here is of a general nature and is not intended to address the particular circumstances of an individual or entity. We endeavor to provide accurate and timely information; however, there is no guarantee that such information is accurate in the future.